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Strategy and the Internet

Michael Porter

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Investment Opportunities for the 21st Century

•Shipping

•Railroads

•Automobiles

•Oil Industry

•Information Highways

•Information Content

•Information Appliances

Product

Transport

Personal

Transport

Information

Transport

1800s

1900s

21st

CENTURY

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INDIA INC. Where are we today ?

Practice of TQM 44Customer Orient 44Use of IT 44Time to Innovate 43Time to market 47Strategy Implement 43

(These are out of 49 Countries : 1996/w.e.f.)

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Overview

Enabling technologies

Emergence of the Marketspace

Value added by information

Theory of increasing returns

Implications for strategy

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What’s Happening to Information?

Convergence of information sources into medium of digital code

Capture – Organize – Select – Synthesize - Distribute

DigitalInfo

Data

Text

Voice

Video

Graphics

Audio

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Where and How Is It Happening?

Information infrastructure

Task Decision Company-wideAutomation Support Infrastructure

Infrastructure as utility functionTransports, stores, processes informationResources available to allIncreases speed of information accessFundamentally changes how people work

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The Changing Nature of IT

Cost: high low extremely low

Data types: simple complex voice, video, Image, symbols

Availability : narrow broad universal

Instrument: computer computer/ digital info TV/ phone appliances

Function : automate automate transform Beside through

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The Changing Nature of Information

Information : point to point network

Bandwidth: narrow broad

Access : exclusive universal

Scope of impact : simple complex

Location: internal internal/ External

Role in Orgn: support strategic

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From Marketplace to MarketspaceEmergence of a Parallel Universe of Business Activity

Products: compact disc to audio-on-demand Ex: MusicNet

Systems: Marketplace to Marketspace mgmt Ex: virtual vineyards

Markets: Physical auctions to electronic Exchg Ex: Aucnet

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Technology Perspectives

“There is a world market of about five computers”

- Thomas J Watson, founder of IBM

“While theoretically and technically television may be feasible, commercially and financially I consider it an impossibility, a development of which we need waste little time dreaming” - lee deforest, American inventor

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From Marketplace to Marketspace

Content

Context

Infrastructure

ContentKnowledge/Substance

ContextOperating Environment

Of Xaction

InfrastructureDelivery or Backbone

Exchange

Customer

Value PropositionTo Customer

Value Proposition

To Customer

Exchange

Customer

MARKETPLACE

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New Economics of Information

Connectivity is shattering the rules about how value is created

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The Old and the New

Encyclopaedia BritannicaSp= $ 1500Cost = $ 200

The way Britannica’s editors must have seen it, Encarta wasn’t an encyclopaedia, it was a toy

MS Encarta Sp = $ 50Cost = $ 1.5

(Funk & Wagnalls)

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Basic Elements of Information

Reach

Richness

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Definitions….

Reach means the number of people at home or at work exchanging information

Richness has three components:BandwidthCustomization Interactivity

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definitions

Bandwidth = amount of information that can be moved from sender to receiver in a given time

Customization = whether the information is tailored for the audience of a particular size

Interactivity = the extent to which the involved parties can converse

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Changing Times…..

Bargaining power shifts to consumers as it becomes increasingly difficult for companies to control access to information Example: car buyers

Existing value chains will fragment into multiple businesses that have their own sources of competitive advantage Example: speciality cos

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The Traditional Economics of Information

Reach (connectivity)

Richness

(Bandwitdh, Customization,

Interactivity) Traditional

Trade-off TV

Salesman

Telemarketing

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Implications for Competitive Advantage

Existing value chains will fragment into multiple businesses, each of which will have its own sources of competitive advantage

Some new businesses will benefit from network economies of scale, which can give rise to monopolies

As value chains fragment and reconfigure, new opportunities will arise for purely physical businesses

When a co. Focuses on different activities, the value proposition underlying its brand identity will change

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Implications for Competitive Advantage (…contd.)

New branding opportunities will emerge for third parties that neither produce a product nor deliver a primary service

-Bargaining power will shift as a result of a radical reduction in the ability to monopolize the control of information

-Customers’ switching costs will drop, and companies will have to develop new ways of generating customer loyalty

-Incumbents could easily become victims of their obsolete physical infrastructures and their own psychology

-

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Deconstruct Your Business….

How and where in your value chain does information reside?

Where are you making trade-offs between richness and reach?

How can these trade-offs be eliminated?

Which activities – especially informational activities – could function as stand alone businesses?

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The End of Channels and Hierarchies

Hierarchical Decision Tree

Hierarchical Organization

Hyperarchy

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IT Laws :

Moore’s Law :Semiconductor performance would doubleevery two years

Metcalfe’s Law :The value of a network increasesexponentially, as the number of usersincreases, while networking costs increaselinearly

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Dimensions of ITMicrominiaturisation

Networking

Intelligence

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Factors of ProductionLand, Labour, Raw Material, Capital - Finite

Information, knowledge - Inexhaustible-----------------------------------------------------------Unlike a single blast furnace or assembly line knowledge can be used in two places at the same time.-----------------------------------------------------------Application of appropriate information technology brings down the requirements of other factors of production

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The Net Way offers crystal-clear cost benefits

Old WayAverage Telephone Transaction

Cost$5.00

Traditional Bank Transaction Cost

$ 1.07

Traditional Airline Ticket Processing Cost

$ 8.00

New WayAverage Internet Transaction

Cost $ 0.01

Same Transaction on the Web$ 0.01

Same Transaction on the Web$ 1.00

Source : eMarketer(www.emarketer.com)

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“The quality and quantity of informationcomprehended per unit of time may now

determine who wins or losesa sales order or a war”

- Mel PhelpsVenture Capitalist

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Strategy and the Internet

The Internet powerfully influences :

Industry Structure, and

Sustainable Competitive advantage

These in turn affect profitability

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Industry Structure

Derives from basic forces of competition:

Competitor rivalryEntry barriers for new competitorsThreat of substitute offeringsBargaining power of suppliers, channels and buyers

How does internet affect these forces?

More rivalry, lower entry barriers due to leveling of playing fields because of open systemDramatically increases available information, shifting bargaining power to buyers

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Sustainable Competitive Advantage

Comes from:

Operational effectiveness

Strategic positioning

OE = doing what your competitors do, but better (speed, flexibility, efficiency)

Strategic Positioning: delivering unique value to customers by doing things differently than your competitors

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The Internet as Strategic Complement

Common IT platform for all activities, reinforcing strategic fit among the activities/ functions. Difficult to imitate

Complements traditional channels. Ex: Walgreen drug store, order over internet, pick up medicines from stores

Integrates virtual and physical activities. Ex: use Web site to attract customers and draw them to flesh and blood sales people to provide personalized advice and after sales service

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The Six Principles of Strategic Positioning

1. Right goal – superior long term return on investment

2. Value proposition – set of benefits, different from those that competitors offer

3. Distinctive Value Chain – perform different activities from rivals, or perform similar activities in different ways. Configure manufacturing, logistics, service delivery, marketing, HR management tailored to its unique value propsition

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The Six Principles of Strategic Positioning (contd)

4. Trade-offs – forgo some product features, services or activities in order to be unique at others

5. Fit – choices throughout the value chain that are interdependent.e.g product design, manufacturing, after sales service must reinforce each other

6. Continuity of direction – to be able to develop unique skills and assets in line with the value proposition

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Think of Prominent Applications of the Internet in the Value Chain

Primary activities

Inbound logisticsOperationsOutbound logisticsMarketing & salesAfter sales service

Secondary activities

Firm infrastructureHuman Resource ManagementTechnology developmentProcurement